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Our roundup of Canadian small-caps in the news today.


Inside the Market's roundup of some of today's key analyst actions

Canaccord Genuity upgraded BJ's Restaurants (BJRI-Q) to "buy" from "hold" "as we believe the current price represents an attractive entry point and provides a compelling risk/reward for investors with 12- month horizon," said analyst Lynne Collier.

"Our thesis is predicated on: (1) We believe BJRI is is a well-positioned "polished" casual dining brand that remains relevant with consumers; (2) BJRI has several initiatives that we believe are gaining traction and could drive improved SSS [same-store sales]; (3) We see significant unit growth opportunities long term as we estimate BJRI can more than double its current base of about 200 restaurants; (4) Off-premise (to-go/delivery) represents a material growth opportunity as it represents just 5.6 per cent of sales (well below peers); (5) year-over-year same-store sales laps significantly ease beginning in Q3; and (6) Attractive valuation as shares are trading at just 7.3 times EBITDA [earnings before interest, taxes, depreciation and amortization], more than one standard deviation below BJRI's historical average and below comparable peers. We believe shares have trended lower in recent weeks in anticipation of a Q2 sales miss. While we are lowering our SSS estimate to -0.8 per cent (from +0.4 per cent) and believe a comp miss is possible (Street = +0.2 per cent), we think shares are mostly discounting the potential "negative" news. Our price target  of $45 implies upside of about 28 per cent and assumes an EBITDA multiple of about 9.5 times (5-yr. avg.)," she said.

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"We are taking a more conservative approach to Q2, lowering our SSS estimate to -0.8 per cent from +0.4 per cent. We are also reducing our Q2 EPS projection from $0.52 to $0.50 to reflect the lower sales estimate and also a slightly higher COGS [cost of goods sold] projection (reflecting new menu items). For FY17, we are trimming our EPS estimate to $1.76 from $1.79. For FY18, we are lowering our projection to $2.03 from $2.06."

Her price target remained at $45 (U.S.). The consensus is $44.80, according to Thomson Reuters.


Alterra Power Corp. (AXY-T) is reducing its debt as its subsidiary, Magma Energy Sweden, is negotiating a final settlement of its $71.3-million (U.S.) non-recourse bond.

As a result, Canaccord Genuity is raising its price target on Alterra to $7.50 (Canadian) from $6.75. Analyst David Galison kept his rating at "speculative buy." The consensus is $7.47.

"The bond will be settled by surrendering 12.7 per cent of HS Orka to the bondholder reducing Alterra's ownership to 53.9 per cent from 66.6 per cent. The Sweden holding company bond was originally issued in conjunction with the acquisition of HS Orka and the bond matures on July 16, 2017. We recognize removing $71.3-million (previously $64.7-million at end of Q1/17) in debt goes a long way to help clean up the balance sheet. On the surface, with the $6.6-million (U.S.) increase in debt we view the transaction as positive from a near-term debt reduction and volatility perspective. However, Alterra is also giving up some of the embedded growth contained within HS Orka," he said.

"Applying our target multiple to our revised base 2018E outlook has a positive impact on Alterra's near-term valuation. The net impact is a about $0.73 (Canadian) per share increase to our base valuation," he said.

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"Some investors could extrapolate an implied value for AXY based from the bond collateral. If 12.7 per centof HS Orka is valued at $71.3-million (U.S.), this could suggest a total value for HS Orka of $561.4-million. A 53.9 per cent ownership suggests AXY's portion could be worth $302.6-million, well above the company's current market cap."


DragonWave Inc.(DRWI-T;DRWI-Q) reported first quarter results that were below expectations and CIBC has cut its price target on the stock in response. "We expect the stock to trade down on these results."

CIBC analyst Todd Coupland kept is "underperformer- speculative" rating on the stock but cut his price target to $1.05 from $1.15. The consensus is $1.09.

"Lower sales continue to put pressure on balance sheet liquidity as the company assesses short-term liquidity options. We continue to wait for Sprint orders to materialize, which have again been delayed," he said.

"One additional issue to monitor is the ongoing arbitration with Bharti (in India). This largely binding process is expected to conclude by September, 2017. Dragonwave has claimed damages in the tens of millions, which is material if the case were to be ruled in its favour."

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"Fiscal Q1 sales were $9-million (us $9.5-million) with adjusted EPS of -$0.57 (us -$0.29). Assuming Dragonwave can gain support from its lenders, it could allow the company to execute against customer orders later in 2017. We will re-evaluate whether this assumption is supported by backlog and known network densification orders from Sprint if and when its business picks up and is awarded to Dragonwave," he said.

"Our takeaway is that the weak Q1 results and balance sheet problems support our Underperformer - Speculative rating. 1) We model F2018 revenue of $42MM, which yields EPS of -$1.80, and introduce our F2019 revenue estimate of $44-million, which yields EPS of -$1.50. 2) Dragonwave's cash burn and balance sheet are not yet under control. The company has pro forma cash of about $4-million and debt of $17-million. The burn rate in fiscal Q1 was about $4-million. Dragonwave hopes to work through a restructuring plan with its lenders, Comerica and EDC.

3) Dragonwave trades at calendar 2018E EV [enterprise value]/Sales of 0.5 times versus its peer Ceragon at 0.6 times. Peers trade on average at 1.3 times EV/Sales."


RBC Capital Markets does not expect any further bids for medical device company Novadaq Technologies Inc. (NVDQ-Q). As a result, RBC analyst Douglas Miehm downgraded the stock to "sector perform" from "outperform" and lowered its price target to $11.75 (U.S.) from $12. The consensus is $11.65.

"On June 19th, Novadaq announced a definitive arrangement with Stryker, which agreed to acquire the company for $11.75 (U.S.) per share in cash, implying a total equity value of approximately $701-million, representing a premium of 96 per cent. For more detail on the transaction, see our June 19th note. Filings highlight bidding process had been run. As we anticipated another bidder could emerge given its market-leading fluorescence-imaging technology, the circular released yesterday evening noted that a bidding process had been run ahead of the Stryker acquisition. Consequently, we do not anticipate any future bids and are reducing our price target to the transaction valuation; $11.75, which is slightly below our $12.00 fundamental value. We are also downgrading NVDQ from Outperform to Sector Perform and are removing our Speculative Risk qualifier," he said.


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About the Author
Assistant Editor, Globe Investor

Gillian Livingston started her journalism career at The Gazette at Western University. She's worked for The Financial Post, Dow Jones Newswires and The Canadian Press as a reporter for news, business, markets and Ontario politics. More


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